Information Needed to File Taxes for Rental Property Investments
Keeping accurate financial records is important all year long, but as tax season approaches, many real estate investors start thinking about one question: What information do you need to file taxes for rental property investments? The IRS doesn’t require a particular recordkeeping system or method for real estate investors, but to file taxes, you must have a summary of your business transactions for the year, as well as supporting documentation to back up the figures for your income and expenditures. If the IRS examines any of your tax returns, you must be able to produce support for the figures on your returns. If you fail to follow the IRS reporting requirements, report incorrect or incomplete information, or fail to file a return, you may be penalized. To avoid those penalties, keep your rental properties’ account books up to date and have the following supporting documentation on file.
Income Records
Gross rents are the income you receive as a rental property owner. Keep any documents that show the amounts and sources of your rents. Depending on how your rental property is set up, your proof of income may include any of these documents:
● Bank deposit slips
● Electronic deposit records
● Invoices for rent
● Receipt books
● Credit card charge slips
● 1099-MISC forms
Note that rental income includes more than just normal rent payments. Payments for canceling a lease and advance rent payments are considered rental income. So if you receive the first and last months’ rent this year, report the full amount received, even if the last month’s rent wouldn’t apply until the lease ends the following year. If your tenant covers an expense you would usually pay, and then they deduct the amount from their normal rent payment, the expense paid by the tenant counts as rental income. And if you pay the utility bills for your rental property, when your renters reimburse you, that is rental income as well.
If you receive property or services in lieu of rent, the fair market value of the property or services counts as reportable rental income. For example, if your tenant is a carpenter, she may offer to make repairs to your rental property instead of paying one month’s rent. If you accept her offer, then you should include in your rental income the amount your tenant would have paid for the month’s rent. You would also include that same amount as a rental expense for repairs and maintenance on your property.
Security deposits count as rental income when the tenant doesn’t live up to the lease terms and you keep part or all of the deposit. If you are currently holding deposits that are refundable at the end of the lease, those doesn’t count as income.
Expenditures
Rental property owners are no strangers to property-related outlays, the costs you incur to run your business. When you have to repair a broken window, bring in a cleaning crew, pay the insurance bill, or advertise your rental unit, keep the paperwork for those transactions. Make sure your supporting documents list the payee, the amount paid, and the transaction date. Also include a description of the service received or the item purchased that proves the cost was a business expense. Keep these documents to back up your recorded expenses:
● Canceled checks or payment confirmations
● Cash register receipts
● Account statements
● Credit card receipts and statements
● Invoices
How you account for and deduct travel, transportation, entertainment, and gift expenditures depends on how your rental property business is structured. Your CPA will help you determine how much of these expenses are deductible for your business, but despite the deduction amount or your business structure, you still must provide supporting documentation for those expenses.
Keep in mind that since one document may not provide all the required elements to substantiate an expense, you may need a combination of documents. For example, if you order a new ceiling fan for your rental property, the credit card statement will show the transaction date, amount paid, and the merchant’s name, but the statement won’t show what you bought or how it’s related to your rental property. If you receive an order confirmation or packing slip showing the item purchased, make a note on the document showing which property it was for. Then use the confirmation or packing slip along with your credit card statement to corroborate the expense you record in your account books.
Once you’re ready to work on your taxes, your business structure determines which forms you’ll use to report your income and expenses. When you’re a sole proprietor or individual, you deduct income and expenses related to rental real estate on Schedule E of Form 1040, but partnerships and S corporations use Form 8825.
Assets
If you own rental property, you own assets. The property and equipment used in your business must be accounted for, and your records must verify the information needed to calculate the depreciation for your assets each year or to determine your gains or losses when you sell an asset. Typically the required information can be found on real estate closing statements, purchase orders, sales invoices, or canceled checks. Make sure your records include this information:
● How the asset came into your possession
● Date of acquisition and purchase price
● Costs of any improvements
● Section 179 and depreciation deductions taken
● Deductions taken for casualty losses, like losses from natural disasters
● How the asset is used
● How the asset was disposed of and the date of disposal
● Selling price and expenses
Employment Taxes
If your real estate investment business has employees, you must keep employment records for at least four years. The IRS requires you to maintain specific employment tax records, like employment tax returns, payroll tax reports, and withholding records. Your state may have additional reporting requirements, so consult with your CPA or attorney. See Recordkeeping for Employers and IRS Publication 15 for more information.
Conclusion
Your business structure affects the deductions you’re able to take as a rental property owner and determines which reports you’re required to maintain. However, no matter what your business structure is, you must provide accurate financial records for your real estate investment business and have supporting documentation to back up your financial reports. Keep your supporting documents organized and stored in a safe place, like an REI Hub account. REI Hub makes tracking your investment property’s expenses easy, with automatic transaction imports, built-in templates, receipt storage, and comprehensive financial reports. Create a free trial account now to streamline your rental property bookkeeping and get ready for tax time.
